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GCC Banks Rebound As Economy Recovers

GCC Banks Rebound As Economy Recovers

There still remains regional disparity between banks’ performances but the majority of them are seeing solid asset growth and higher earnings.

Off the back of steadier results Gulf banks have been helped by a more in the previous year, 2013 was a stronger year for Gulf banks and the GCC banking sector.
Most banks have booked higher profits in 2013, driven by increased loan asset growth, wider interest margins, greater fee and commission income and generally lower loan loss provisioning charges.

This momentum should be maintained moving into 2014 as economic growth in the region continues, loan asset quality improves and asset prices remain quite robust. A slightly more encouraging sentiment for the international banking sector has added to the more positive feeling as, despite problems, critical banking challenges have lessened.

Net profit growth in the first six months to June 2013 for the GCC banking sector grew by a much higher estimated rate of 14 per cent, up from six per cent in the first half of 2012. This compares to profit growth of 10 per cent for the sector for full year 2012 and the forecast for 2013 of high teen profit growth. The UAE and Kuwait banking sectors recorded much higher profitability, rising by over 20 per cent for both. Qatar also continued to book good results.

GCC banking sector assets were up by an accelerated 10 per cent in the first half of 2013, driven by loan expansion.buoyant regional economy in 2013, supported by good oil prices and high levels of government spending and capital expenditure projects.

Retail and consumer loans have also grown, reflecting increased disposable income. Total loan growth in the GCC was forecast at 13 per cent for the six months to June 2013, led by credit expansion of 23 per cent in Qatar, 18 per cent in Kuwait and 13 per cent in Saudi Arabia. Loan expansion throughout the Gulf together with better liquidity in the region for banks has helped to widen margins, which had been squeezed for some years. Loan growth has also aided fee expansion as has the strong performance of GCC capital markets in 2013.

For UAE banks, Emirates NBD achieved a 40 per cent growth in net profit in 1H 2013, aided by both higher net and non-interest income. For the first nine months of 2013 to September, the bank’s net profit was 34 per cent higher against the period in 2012. Provisions rose in the period but so did loan loss coverage. Other leading UAE banks such as National Bank of Abu Dhabi and Abu Dhabi Commercial Bank saw higher profit in first half 2013.

Among Kuwait-based banks, net profit of Commercial Bank of Kuwait rose substantially, helped by falling provisions. Kuwait Finance House profit was up by 29 per cent due to both financing income and lower provisions to June 2013. National Bank of Kuwait (NBK), the largest Kuwaiti bank, reported net profits of $702 million for the first nine months of 2013 compared with $809 million for the same period in 2012. Adjusting for the exceptional gains of $288 million recognised in September 2012 on the consolidation of Boubyan Bank, net profit grew 35 per cent year on year.

Qatar National Bank’ net profit was higher by 14 per cent to June 2013, and by the same percentage to September 2013. Both net interest income and fee and commission income was much higher but results were held back by higher expenses and increased impairment on loans. National Commercial Bank of Saudi also saw stronger profits in 1H 2013, rising by 20 per cent.

Performance wise, Qatari banks remain among the best. Banks in Qatar have maintained their loan growth momentum due to an increase in public sector spending as the country prepares to host the FIFA World Cup in 2020. Recent acquisitions made by Qatari banks such as Qatar National Bank have also driven loan growth.

Saudi Arabian bank lending is being driven by domestic economic expansion and substantial capital investments,particularly in infrastructure and manufacturing. In addition, growth is being supported by the recently implemented mortgage lending law. Saudi Hollandi Bank has recorded amongst the highest growth in loans recently due to strong SME lending.

In Kuwait, Burgan Bank recorded high lending growth, up by over 30 per cent, due to international operations and the consolidation of Turkish subsidiary Eurobank, Tefken which was acquired in December 2012. UAE banks have registered more moderate loan growth, rising by around eight per cent, despite economic growth in the emirates and a continued recovery in the real estate sector. The moderate UAE growth reflects the cautiousness of UAE banks following difficulties in recent years.

Emirates NBD, followed by Kuwait Finance House, achieved the biggest increases in net profit in 1H 2013 among the ten largest banks in the GCC, but both from relatively low bases. QNB again recorded the highest net profit figure, followed by National Commercial Bank which overtook Al Rajhi Bank of Saudi Arabia. Al Rajhi remained the most profitable bank amongst the region’s largest ten institutions but its return on assets fell from 2012.

The level of non-performing loans in the region is estimated at 5.2 per cent of total loans. There remains significant variance in NPLs between countries, ranging from a low of 1.6 per cent in Qatar to a high of around nine per cent in the UAE. The UAE ratio, the legacy of real estate and other corporate loan issues, has peaked and is expected to fall from this year onwards.

SECTOR DISPARITY IN PERFORMANCE

Noted differences in performance are apparent within the six states in the GCC, largely a function of market characteristics and operating environments. Banks in Qatar continue to be the most profitable and record the highest rates of asset growth. However, the gap has narrowed between Qatar and Saudi, which is the biggest domestic banking market in the Gulf and is close to Qatar in both profitability and asset growth. The UAE’s sector growth is also improving as is Kuwait’s.

Liquidity remains adequate in the GCC banking market. In some markets, particularly Qatar, money supply growth is being driven by foreign currency deposits, in part reflecting higher contribution from the non-oil sector.

GCC countries have sufficient liquidity to finance the large investment projects planned over the next few years. GCC liquidity, as measured by the money supply (M2), increased by 12 per cent year-on-year to June 2013. High energy prices and increased hydrocarbons production are feeding through to the non-oil sector through higher liquidity. This higher growth in the GCC money supply enables the private sector to expand economic activity.

The narrower definition of the money supply (M1) in the GCC increased by a higher 17 per cent this year. The increase is associated with the low interest rate environment that has been prevalent in recent years, which encourages depositors to hold short-term deposits. Saudi Arabia has the largest money supply in the region, expanded by 13 per cent this year, reflecting a significant increase in demand deposits. Money supply growth in the UAE has experienced a good recovery in 2013, attributed to the significant pick up in real estate activity and an overall gain in investor confidence.

Investment projects planned or currently underway in the GCC are valued at a huge $2.2 trillion. With huge project financing needs coming up over the next decade, GCC countries will need to further supplement overall bank liquidity with additional sources of funding. The corporate debt markets have emerged as a good funding option in recent years. This year up to June 2013, debt issuance in the GCC region reached a record level of $34.6 billion. The GCC countries have also started developing their own domestic debt capital markets, helping to reduce the need for foreign financing.

GCC REMAINS A BRIGHT SPOT WITHIN MENA

The GCC countries, China and sub- Saharan Africa are likely to be engines of future global growth with international economic growth remaining lacklustre. Qatar will lend the GCC region with a projected growth rate of around six per cent in 2013 and 2014. GCC countries will continue their drive to diversify from the hydrocarbon sector through infrastructure investment and a growing service sector.

Economies in the GCC are growing at a good rate and, over the medium term, the further development of international trade flows and an expanding middle class are expected to fuel future growth. Rising FDI flows are helping to transform trade opportunities across Turkey, the Middle East and Africa, with particular expansion in banking and financial services.

The UAE is expected to grow by around four per cent this year, the fastest pace since 2008, supported by infrastructure development and an improved business climate. This increase will be driven primarily by the recovery of key sectors, including financial services and construction. The UAE has focussed on diversifying its economy, concentrating on the non-oil sectors, with significant infrastructure projects planned in both emirates. Moreover, fiscal policy will remain accommodative in both Dubai and Abu Dhabi, with several infrastructure projects in the pipeline.

The economy of the wider MENA region is expected to grow by three per cent in 2013, down from 3.7 per cent in 2012. This decrease can be partly attributed to lower commodity prices and reduced demand for Middle East exports. The current political situation in Egypt is also continuing to impact economic activity across the region.

GDP growth in Saudi Arabia is projected at 4.3 per cent in 2013 and 4.6 per cent in 2014. These figures represent a slowdown from 6.8 per cent in 2012, which can be attributed to reduced oil production. In contrast to developments in the oil sector, non-oil growth will remain robust in the next few years. Consumer spending will grow strongly, buoyed by fast growth in retail lending and a falling unemployment rate.

NON-PERFORMING LOANS NO LONGER A CRITICAL ISSUE

Although in some markets, such as the UAE and Kuwait, non-performing loans are still quite high, they are well provided for and, more importantly, are on a downward trend. Most bad loans have been connected to the real estate and investment sectors. The real estate sector has improved and prices for assets have increased. Consumer loan delinquencies need to be monitored but tighter regulations by GCC central banks have helped put a lid on increased bad debt.

The Arab spring has not had a major impact on GCC banking performance. Certain Gulf banks with exposure to countries such as Egypt, Syria and Tunisia have experienced some bad loans and recorded losses at subsidiary banks, but the level of exposure is small and thus the impact is limited.

Despite these problems, in some markets such as Egypt, GCC banks have seen it as an opportunity to make acquisitions. Bahrain was most affected by the Arab spring and its financial sector was directly hit and is still recovering from the impact.

PROSPECTS FOR THE GCC BANKING SECTOR ARE PROMISING

Full year 2013 should be a better year for GCC banks with improved profitability. This trend should continue into 2014 as banks grow their loan assets, resulting in increased interest income. Fees and other non-interest income should also expand, helped by increased capital market activity, brokerage.

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